PDF Credit ~ The Basics Participant's Guide

Credit ~ The Basics Participant's Guide

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Table of Contents

? Welcome ? Pre-Test ? What is Credit & Why is it Important? ? Types of Loans ? The Cost of Credit ? The Four C's of Credit ? Credit Reports ? Credit Scores ? What Doesn't Affect Your Score ? How To Improve Your Score ? How To Read Your Credit Report ? Effects of Good and Bad Credit ? A Tale of Two Scores ? Sample Dispute Letter ? Opting Out ? How to Get Your Free Annual Credit Report ? FTC Guide ~ Credit Repair: How To Help Yourself ? Post-Test ? Glossary

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Welcome

Welcome to the Credit ~ The Basics module! Objectives After completing this module, you will be able to: ? Define credit and loan ? Understand credit reports and credit scores ? Distinguish between secured and unsecured loans ? Identify the costs associated with getting a loan ? Identify the factors lenders use to make loan decisions Participant Materials This Credit ~ The Basics Participant Guide contains: ? Information to help you learn the material ? A sample dispute letter ? Information on pulling your credit report ? Instructions on reading your credit report ? Details on how to opt-out of credit offers

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Pre-Test test your knowledge about credit

1. Select all that apply. Maintaining good credit is important because it: a. Can help you graduate from college b. Allows you to carry more cash than usual c. Allows you to buy expensive items, like a car, house, or furniture, and pay over time d. Might cause your interest rates to be raised

2. What is a loan? a. A charge by a financial institution for maintaining or servicing your loan account b. Money you borrow but must also repay c. Something valuable that you own and can sell for cash d. The cost of borrowing money

3. What type of an interest rate changes periodically? a. Fixed rate b. Variable rate c. Waning interest d. Dual rate

5. What should you review and compare when shopping for a loan? a. Annual percentage rate (APR) b. Fees c. Truth in Lending Disclosures d. All of the above

6. What four factors do lenders generally use in their loan making decision? a. Collateral, capacity, capital, and whether you purchase their credit protection insurance b. Capital, character, overdraft protection, and collateral c. Capacity, capital, collateral, and character d. Character, collateral, capacity, and credit limit

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What is Credit & Why is it Important?

Credit is the ability to borrow money. When you borrow money on credit, you get a loan. You make a promise to pay back the money you borrowed plus some extra. The extra amount is part of the

cost of borrowing money. This cost is also called interest. If you use credit carefully, it can be useful to you. Not being careful in the way you use credit can cause

problems. You have probably heard the term "good credit." Having good credit means that you make your loan

payments on time to repay the money you owe. If you have a good credit record, it will be easier to borrow money in the future. However, if you have problems using credit responsibly, it will be harder to borrow money in the future.

Why Is Credit Important? Credit is important because it: ? Can be useful in times of emergencies ? Is more convenient than carrying large amounts of cash ? Allows you to make a large purchase, such as a car or house, and pay for it over time ? Can affect your ability to obtain employment, housing, and insurance based on how you manage it

Collateral ? Collateral is security you provide the lender. Example: You pledge an asset you own, such as your home,

to the lender with the agreement that it will be used as repayment if you cannot repay the loan. ? A guarantee is a form of collateral. Example: Cosigning is a form of guaranteeing a loan; if a person with

no credit history asks another person to cosign a loan, the cosigner is equally responsible and has to repay if the borrower defaults. ? In a secured loan the borrower offers collateral for the loan. Example: Collateral is given up to the lender if the loan is not paid back. Home equity loans and home equity lines of credit are examples. ? An unsecured loan is not backed by collateral. Example: Credit cards are often unsecured loans, although some are secured. Other examples include personal and student loans. ? An asset is something valuable that you own like a car, savings and investment accounts, and property such as your home.

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Types of Loans

Consumer Installment Loans A consumer installment loan is used to pay for personal expenses for you and your family. Examples are: ? Auto loans, whereby the automobile you are purchasing is used as collateral for the loan ? Unsecured loans for short-term needs, such as buying a computer

Credit Cards ? Credit cards give you the ongoing ability to borrow money for household, family, and other personal

expenses. ? Having a credit card allows you to buy things without actually having the money right away. Remember

that if you are not careful in spending, you can get into big trouble--you could be burdened with debt. You need to be sure you are able to make the minimum monthly payment on your credit card bill.

Home Loans There are three main types of home loans. ? Home purchase loans are made for the purpose of buying a house. These loans are secured by the

house you are buying. ? A home refinancing loan is a loan that replaces an existing home loan by paying it in full and replacing it

with a new home loan. A cash-out refinance loan allows you to borrow more money than owed on the loan to be replaced. Reasons homeowners might want to refinance their home loan include getting:

? A lower interest rate ? Money for home repairs ? Money for other personal needs ? Home equity loans allow you to borrow money that is secured by your home. Equity is the value of the home minus the debt or what you owe on the home loan:

Value of Home$250,000 Minus debt -200,000 Equity$50,000

? If you already have a home mortgage, such as the original home purchase loan, the home equity loan would be a second mortgage also secured by your home. A lender may allow you to borrow up to a certain percentage of your home's value, generally up to 80 percent. These loans can be used for any reason.

Remember: Any type of home loan you obtain is secured by your house. If any home loan is not repaid, you could

lose your house.

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